Stuart McGehee and Michael Bowers agree with Warren Buffett who declares successful investing isn’t about effort or talent. More than anything, it’s about time. After decades of empirical observation and a thorough review of non-biased, academic research during their careers, Stuart and Michael have concluded and agree that a simple, low-cost, transparent, and disciplined investment approach offers a far better chance for investors to achieve and to sustain financial independence than a high-cost, active investing approach. But they arrived at their conclusions by taking different routes to get there.
Michael started investing in stocks as a teenager. Under the tutelage of his grandfather, Michael began investing in stocks by researching and selecting – or picking – the stocks of companies he and his grandfather thought would do well. And many times they were rewarded for their diligence and foresight. But despite their efforts, they were unable to avoid poor performing stocks while they were selecting their winners. The poor performing stocks would offset their high flying successful picks, and over long periods of time, Michael and his grandfather’s portfolio was unable to deliver returns superior to the overall stock market.
Stuart spent over a decade and a half on the institutional fixed-income (bond) side of the financial services industry. Every business day, Stuart would arrive at work and log in to the Bloomberg terminal on his desk. The real-time information at Stuart’s fingertips was unmatched. He could get real-time trading data and research on stocks, bonds, commodities, futures contracts, currencies, and virtually anything else in the financial services industry. With this wealth of information, Stuart surmised he could spot trends, identify opportunities, and be able to execute trading strategies that mere mortal investors could not. Stuart believed he had a built-in information-based advantage. But it simply wasn’t so. Over long periods of time, Stuart was unable to beat the stock market indexes. Like Michael, it was too difficult to avoid the losers even while enjoying the successes.
Over time, Stuart and Michael also learned something very interesting from unbiased academic research. The percentage of professional money managers who are able to beat the markets – including, of course, mutual fund managers – is astoundingly minimal. Depending on which study and over what time periods these professors conducted their research, the results were consistent; fewer than 10% of professional money managers who employed active management were able to achieve better results than the low-cost index against which these money managers were benchmarked. So over 90% of these highly educated, handsomely compensated money managers performed WORSE than the stock markets, or in the case of a fund manager, the stock index which the managers were supposed to beat, and those who were able to temporarily outperform were unable to sustain that outperformance!
CONCLUSION: Rather than trying to pick the money manager or fund manager who might beat the market in the short-term, investors will most often be far better off economically if they have a broadly diversified, low-cost portfolio comprised of a situationally appropriate asset allocation based on the results of their personalized financial plan! Counterintuitively, it’s that simple! As Vanguard founder Jack Bogle says, “Don’t look for the needle in the haystack. Just buy the haystack.”